Canada likely to be a big winner as volume gearing becomes increasingly important.
JOHANNESBURG (MINEWEB) – The current environment should be viewed as a fairly abrasive palette cleanser between the first course of the commodities super cycle and the main one that is soon to start.
But, while the starter was hearty fare that pleased all tastes, raising prices and stocks of all stripes, the main course is going to be a much subtler dish, full of complexity. And, most importantly, one focused on volume rather than purely on price.
This is the view of Investec Asset Management investment strategist, Michael Power, who told Mineweb, “We are just moving into the main course – it is going to be fairly drawn out. It’s going to be when China really reaches its potential; when by 2020 it is adding an economy the size of Japan to its growth every year, and then India and Indonesia and a few other players are actually starting to nip at its heels in quite a material way.”
But he says, not everyone is going to be a winner.
“Winners are going to have to be built on relatively easily accessible, relatively connectable supply where the costs associated with setting up the recovery are not going to be ridiculously high…because the reality is that the base that this growth is now being generated upon is so enormous that it is probably more important to look at the quantum of growth that is being generated from one year to the next, rather than the GDP growth rate.”
Described as the ‘magic dust of capitalism,’ Power explains this volume gearing as the situation in the market place that allows the producer to make more money, even as prices fall, by selling more units while the consumer benefits through the receipt of more for less.
And Power says, given this scenario, there are a number of countries that stick out as potential beneficiaries.
Mongolia is one of the obvious ones he says, as it is stuck between China and Russia and is sitting on significant amounts of commodities like copper and coal.
Indonesia, too, has potential, Power says, it has both people and resources; in many respects it is the Brazil of Asia. And, it has the added benefit of offshore gas, which he points out, is very easy to leverage from a volume point of view as the infrastructure required is significantly less.
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